Saturday, April 29, 2006

Can We Expect To Get Lucky?

Somebody once said, “The moment I leave something on luck. It runs away.”

One thing that has always fascinated me is the way some people overemphasize the luck factor in life. I have thus for long tried to understand how important is the element of chance in achieving success.

Social Proof & Luck:

As often happens in the free market economy if there is a demand to be met, somehow it will be met. Thus the desire of the people to increase their probability of getting lucky has become a great market in India, at the least. The market comprises of astrologers mainly who always have reason for everything that has happened to you. I don’t know if that all works or not but I know for sure that people tend to overemphasize the utility of these things. This reminds me of a famous quote by J.K.Galbraith,

"This is a world inhabited not by people who have to be persuaded to believe but by people who want an excuse to believe."

Probability & Luck:

Probability is omnipotent and omnipresent. It influences every coin at any time in any place, instantly. It cannot be shielded or altered. And probability is not limited to coins and dice and slot machines. Probability is the guiding force of everything in the universe, living or nonliving, near or far, big or small, now or anytime”—Scott Adams

I think that the above para explains pretty well the concept of luck which according to me is nothing but permutation and combination. And only if we can zoom out and see ourselves as the part of the ecosystem it will be apparent that we cannot by any means control the things happening around us all we can try and do is make the best use of the things around us. But the problem is that when things don’t go the way we expect them to go. We would say that ‘I did everything that needs to be done and yet things did not work out. Why?’ I think that the following quote explains it rather well that some things are unexplainable,

Every other question has an answer to why. Only probability is inexplicable”—Scott Adams.

Investing & Luck:

When we try to pick anything by itself, we find it hitched to everything else in the universe”—John Muir

I think once we start thinking of stock markets as an ecosystem we realize that there are lots of variables that can influence it. To add to it, we are not competent enough to understand and extrapolate all the variables into stock market reactions. There will always be this systematic risk which can work against us and sometimes for us.

Thus I think one of the most important thing in investing is to be in a position where we are not required to close a position because of financial need. And if we play the game long enough and diversify as we go along we can expect to achieve what we deserve.

We might see randomness in the outcome of an individual coin toss, but as the number of tosses increases, probability has firm control of the outcome”—Scott Adams


Human nature being what it is we tend to overestimate the influence luck or chance has on the outcome when something goes wrong. This might reduce dissonance for a while but the trade off is the state of psychological denial which is a big drag on understanding things the way they are. And few things are more important than understanding things as they are. Thus I think that the following advice from Charlie Munger is worth its weight in gold,

Whenever you think that some situation or some person is ruining your life, it’s actually you who are ruining your life. It’s such a simple idea. Feeling like a victim is a perfectly disastrous way to make go through life. If you just take the attitude that however bad it is in anyway, it’s always your fault and you just fix it as best you can – the so-called “iron prescription” – I think that really works


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